Investors to get good opportunities in Mar-Jun: Madhu Kela (in Moneycontrol)

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Indian market has given bad time to investors losing almost 25% in 2011. Most foreign investors have fled away from Indian soils and there is a growing nervousness after the S&P downgraded nine Euro nations. However, some experts feel that Indian market has domestic positives that may trigger market.

In an interview to CNBC-TV18, Madhusudan Kela, Chief Investment Strategist, Reliance Capital says that thiese lower levels can be used as an entry point. "The market may go to 5,200 and then may come to 4,500 or 4,400 and that will also look a big fall. This bear market would have spend enough time by March-April-May-June so there is that entry point which is what I am looking at," he elaborates.

He is pining hopes on the budget as Kela feels that the government will take some bold decisions. “It is only post budget that the real acid test will happen. So market may really present a great opportunity from a investor point of view between that quarter of March to June,” Kela reiterates.

Here is an edited excerpt of his comments. Also watch the accompanying video.

Q: What’s your sense, there has been a bit of hope in the last few weeks, but do think a bottom is formed at 4500 or will there be another big dip?

A: Before we come to the market if you allow me let’s talk about the country. What I am perturb about is essentially we seem to be in a self destructive kind of a mood, wherein each one is spreading the panic to the other person and we are now getting compared with countries like Greece and all, to my mind it has absolutely no relevance.

It’s been ages that I heard that demographic of India is great and there is latent demand of infrastructure or there is high saving rate, all those things seems to have got forgotten. I am not saying that there are no challenges, there are, but to compare India with Greece or Italy like a situation, it’s premature, so in a longer term India story in my opinion is still is very much intact.

However, we are in a way in a inflection point that if we do not do as a society and the other thing is it’s so easy to blame government for everything as if the corporate took a loan and the government instigated him to take a loan or to a foreign exchange exposure. It is very easy to blame the government, but collectively unless everyone recognises that if we do not attack this opportunity, which is glaring in front of us over the next 6-12 months and if we remain in this self destructive mood then it could be a very challenging situation.

I hope as we have responded to all the crisis in the past, whether it was a 1991 crisis or whether it was a 2002 crisis, as country we will respond to this crisis also and there are many levers and many opportunities given the global step up, the question is the mindset.

Q: How do equity investors realign themselves or align themselves to the feeling that in six years the market has not gone anywhere? It’s a very unusual situation for equities as an asset class, Sensex has not gone anywhere? So how do investors approach that?

A: Market has its own mechanism to discount everything and which is why people say that the market is the biggest leveler and biggest intelligent machine, which has ever been created. In a lot of situations, in my opinion, market may have discounted that bad news. It doesn’t mean that after you discount the bad news you will start running immediately, so when I see stock prices, a lot of smaller cap or midcap companies, they are very compelling opportunity, so market may spend time over the next 3-6 months, but I think it will present a great opportunity.

Let me say if I had to pin down where 2012, most people are hoping that the market may make a bottom before March and after March everything will be hunky-dory. In fact, I have the other way around. I think market may spent time, earn these levels till budget, but it is only post the budget that the real acid test will happen. So market may really present a great opportunity from a investor point of view between that quarter of March to June.

Q: Why do you say that a real bottom will be formed post the budget? Is it local risk you think post the budget the local macro will determine that or you think globally things will worsen between March and June?

A: Maybe a combination of both. Whatever budget document, which gets presented this time will get hugely scrutinized given over analysis of all the macros, which have happened. You will not be able to get away that you assume there will be a 20% tax increase over next year.I don’t think investor and people will buy that, so that document will be very important and one fear, which I have, which I want to see it play out is on the currency side.

I think that is a vicious cycle of currency, you have 51 to a dollar or 56 to a dollar or 45 to a dollar, all your problems lie there if you go to 56 all corporate balance sheet will look very ugly, leveraging will look very ugly. Let’s not forget we have USD 200 billion of corporate debt or more than USD 200 billion of corporate balance sheet of India, so I want to see that pan out over the next 3-6 months. 

I do not think that money gets attracted just because you offer 1 or 2% higher interest rate, money gets attracted if you offer confidence. I would hope that post the UP election if there is some semblance in Delhi as well and we will get along with the reform agenda.

Which is why I say that let this market pass next two quarters and it may present a good opportunity if people are skeptical about the budget. By then some of the global news flow, which has been off late very positive may play out itself.

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Q: But you do think it will come to pass 56 to the rupee to the dollar? Do you think it will happen this year at some point?

A: I do not think so but if we don’t get our act together we have seen where currencies can go. In 1999 I still remember where Argentina went from where to where.

Now we need to get that confidence and which is why I am saying we are in inflection point. I am an optimistic person so I still believe that government will act together. India has shown resilience in the past whenever there is a crisis we have responded to the crises and we have come out of it.

If you look at just the corporate sector, people are extremely nervous at one end but on the other end people want to selloff whatever they can selloff and get away from their problems.

Q: We haven’t seen FII capitulation so far, you think its possible post the budget because of the factors that you are speaking about?

A: It is possible. I think the capitulation in my mind has happened in smaller companies and midcap companies but it is yet to happen in the large companies, 4,700-4,800 is not the real index.

If you go to B group stocks the index is far worse than what it is getting reflected and market even in terms of valuation that most people are predicting Rs 1,300 kind of EPS for next year so you are still at 12.5 times which is 20-25% higher than the bottom which we made in the past even on a forward basis. So there is that room for one leg down.

Q: You think we will see 4,000 kind of levels sometime this year. Is it possible in your eyes when this post March capitulation happens?

A: I wouldn’t like to pinpoint a number but I think directionally I am saying from investor perspective you might get a very good entry point, now whether it is even 4,500. The market may go to 5,200 and then may come to 4,500 or 4,400 and that will also look a big fall. I don’t know where the market will settle down, all I am saying is in terms of time we would have spend enough time.

This bear market would have spend enough time by March-April-May-June so there is that entry point which is what I am looking at.

Q: Whenever that comes about if it does do you see midcaps once again falling a lot or has so much demolition happened there, destruction happened that some of those midcaps might have already bottomed out in your eyes?

A: I do not think midcaps will fall a lot at least the sectors. For instance real estate in 2008 we had 6 lakh crore of marketcap and it was 7.5% of the overall marketcap.

Today it is less than 1% of the overall market cap and now every company and every balance sheet looks much better than what it was in 2008 crises. Now the prices have fallen to such a level. I do not feel that even in the leg down they will fall substantially.

However they can spend time and it will test patience of investors and wealth creation is not easy; the market will test patience of all the investors. If you have to buy something and forget about it for 3-6 months if you see the prices everyday it is very likely that some news flow of the other will hit your mind and you will end up selling off.

Q: But would you say the same about something a sector like infrastructure, was the price damage has been as brutal as real estate?

A: Unfortunately, there are contracting companies and we don't know what kind of order books situation they have got themselves into. What kind of liquidity situation they have got into at least in real estate I can know that there is a dispute about book value whether it is 100 or Rs 80 or Rs 120. I am saying if Rs 100 book value is available to me at Rs 20 then the margin of error is significantly in my side. I don’t have the same conviction on the infrastructure side.

Q: If there is a leg of capitulation in the largecaps as you expect, do you think it will be the banks once again which will get punished or do you think outperforming sectors will drag it down this time?

A: I think there is a possibility because one thing which I am worried about if the bad situation plays out is on the NPL side. Let’s accept it that there will be a real issue of NPL restructuring. Lot of these loans as the market is thinking may not get return off but how the analyst and the fund management and the overall market will respond to a large restructuring if that has to take place that remains to be seen.

Q: Coming back to the retail and HNI once again when you talk to people they are saying I am going to be in 8.2% tax free bond? Gilt funds is a place to be as interest rates come down, very low conviction about buying equities even at sub-4,500-4,600 kind of levels. Do you see that orientation changing at all in 2012?

A: I think it will only come. They are never the first people to make the bottom, they will always join as the market sees more confidence and more stability. So I am not expecting that they are the people who will create the confidence; the confidence will get created out of prices. If you see the insider list of buyers it is increasing everyday.

People who have got money they are buying whether it is promoter, whether it is institution. I mean wherever there is value which is emerging and I see at some point of time the stock stop falling because there is so much value which is been seen then in order to calculate who will buy it is very difficult and market creates its own buyers.

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Q: What is your own approach to the market right now? You are saying to just hold on for 3-6 months. The big opportunity is coming and then when it comes you should be ready with cash to put in?

A: My approach is that over the next six months, we have to be ready with our homework, wherever the prices come. I don’t invest money directly now, I am guiding all my colleagues wherever there is a capitulation or the opportunity, which is coming in you just have to capture.

All I am saying is don’t be in a hurry, like don’t put all the money at one go. You may have one more leg, I don’t know whether we have or not, but you may have one more leg, so there is some dry powder, which is left with you if that happens that I think will present a great opportunity. So basically be very stock specific, don’t get into fractured balance sheet, don’t anticipate too much because all which is being done and being delivered is also available today at a great value.

You just be systematic in your investing approach and then you had to have a view. You are not likely to create wealth, you can make profit by doing trades in order to create wealth and substantial profit you have to sit on your investments.

Q: Do you think all companies will survive at the end of six months either because of a rupee shock or because of a balance sheet shock because the market seem to have priced in some companies, large companies with bad balance sheet with a real risk of not surviving or seeing post June period?

A: I don’t think all will create value. In India even in 2000, there were 200 companies when it bursted, they are still listed, so I am not calling that as a survivor. I am saying all companies will not participate in wealth creation, people who have real asset and who have real intention.

I would emphasise the word intention more importantly who can recognise that this is really a panic situation and they need to something really out of the box. Those are the companies who had a chance, but what the market has done let's say one month back put everyone on the same cadre that as if everything is going to collapse and India is going to close down, I don’t buy that.

Q: Let me talk about the UP elections, one of your central cases is that the market forms a bottom between March and June. Do you think that holds regardless of benign UP election result and some signs that the market picks up, that maybe some policy changes will come back?

A: I think that is my best case that you will get some positivity from the UP election and there will be some central initiatives. One more point is that this is the year, which is filled with international elections also that in November you have US elections in May, in June you have Germany and France even Iranian elections are coming for whatever it is worth, China there is a regime change this year, lot of this also would have passed by then.

It’s a combination of the good news fading away over the next one or two months and a lot of this would have got concluded. I also feel that there is so much analysis, which has happened on the Europe now, whatever has to happen would happen in the next 6 months and we will be done away with it.

Q: Does crude worry you, you spoke Iran is it a wild card that if crude continues to stay above USD 110-115 per barrel it continues to be a problem for us?

A: I think if it remains at this level then market may have discounted this, but if there is really any disruption, the crude in a big way and if there is a real situation of that tension, which happens then I don’t think crude will go up USD 5 or come down USD 5. Any big spike will certainly worry given our own challenges, which are there.

Q: I was speaking to some investors who are confused right now and they are saying that we don’t have the confidence to go out and buy stocks, but we are looking at individual opportunities like delistings from MNCs where it seems like a relatively safe bet without too much damage. Do you agree that they might throw up opportunities this year?

A: Let me just put it other way around that is like a opportunity in India let just talk and you please put a word of caution. These are not recommendation, just take three companies, take ABB, Siemens and Oracle, these three companies have done purchases of shares in the last 6 months at the much higher prices than what the market today is.

These three companies put together can get USD 4 billion if these companies are delisted in India. That’s what I am saying, tough what is holding them, they are not saying that there is no opportunity in India, what is holding them is lack of confidence that is what I am saying. Once the confidence gets build up there are many levers.

Let’s not forget as a country our P&L has a problem, we have no bankruptcy or balance sheet problem as a country as a whole. There will be opportunities in some of these companies, which would like to delist, take for instance ABB and Siemens apart from India in their home country, they are not listed in any other country in the world, but they operate in all the countries.

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Q: Do you think the charm of consumer focus stock is fading because we have seen FMCG has died down a bit. Some of the fancied names have corrected quite significantly, do you think investors are getting the feeling that their time has come and gone and they will not lead the next rally or the bottoming out process whenever it happens?

A: I think on a relative basis there are more compelling opportunities in the market I am more focused there but there are few companies which will continue to do because of our demographics so I am saying on a relative basis there are better opportunities in the market to make money so I am not too focused in analysing them.

Q: If you are buying at the bottom you are saying that you would need to buy quite bombed out stories because the alpha maybe much better there?

A: That’s right, its like a combination of the overall portfolio so you will end up buying some good largecap stable stocks, you cannot create 100% of portfolio. I am saying the alpha will get created if you do your homework today and buyout some of these names and then hold in for a period of time.

So that 20% which is what we did in 2002 or 2004 or 2005 in the bull market is started we went and put money in some unconventional stocks which were very smallcap or midcap companies. Even if 5 of them worked out 5 years down the line and you see what the wealth investors have created.

Q: But you are confident that we have a bottom this year in the market?

A: I think so, if there is no bottom this year, if there is policy paralysis and negative sentiment continues then even someone like me will give up hope.

Q: But what is your big risk starting from the middle of the year. Do you think we get it wrong again or continue to get it wrong even post the budget in the UP elections or something really go bad happens globally and that leads to a huge liquidity withdrawal and crash?

A: I think it would be just the combination of both these. We have to get it right. I am saying if we get it wrong whatever irrespective of what happens globally - money is extremely competitive in today’s world, everyone want those dollars and for an international investor.

Let’s not forget that we are in an international liquidity squeeze, I got this number from somewhere that European banks alone need to deleverage USD 2 trillion in 2012, so money is at a huge premium. The fact that we have not got our act together that is why we are not attracting otherwise in longer term story. It is only the confidence gap.

If we don’t get our story right then irrespective of what happens globally. I think most people will then give up on India.

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Q: What’s the sense you get when you speak to the large global investors. Are they waiting for say another 3-6 months to see if we can do it and do you think even they will give up at the middle of year if they don’t see a turnaround?

A: I think so. I think there are lot of people who may have given up mentally, which is why so many people are really underweight on India, but there is that class, which missed out in the rally and it did not part participation in the last few years. Some of those people are looking this as an opportunity with the hope that his country will respond as it has responded in the past out of this crisis.

Q: So having waited six years, do you think now equities will turnaround at some point this year and start generating fixed income plus returns?

A: I think so. I would be optimistic about that because in last six years let’s also not forget that our EPS actually has gone up 50% while the index has remained even at a broader level.

Q: So a derating has happened?

A: Huge derating has happened and this sideways markets are very painful that we have a very marginal increase in earning and you have regression in PE multiple, which is what creates a sideways markets.

Still today there is a earning growth, but the PE multiples are coming down and in India's case one more point is that we still have 30-40% premium over the world emerging markets, why should this premium sustain if we do not respond this time again. What the market is also indicating at a broader level that we will respond as a country.

Q: Do you think the budget is important this time, assumes even greater importance?

A: I am quite hopeful that some bold decisions will be taken in the budget because now there is no elections after this, timing is just perfect that you have the budget in the March. People will really look at this budget with double lenses and every number is scrutinized.

Q: What do you think will be more important in the budget, the fine print that you are talking about or the signals and the sentiment factors like announcement of some bold moves, which can mask the fine print, which does not look great?

A: Fine print will be very important because we have done the bold moves already. We have been talking that the GST should be done and there is no debate about it, but now we need to see is there a timeframe in which GST will be done and we will be done away with it. This time around no one is going to believe if you say that your subsidy burden is only going to be Rs 30,000 crore.